Category: Daniel Gros

CHANGE THE EU TREATY RULES ON DEBTS AND DEFICITS, IF NECESSARY…. BUT DO NOT BEND THEM

The European Union is a union of sovereign states, who are sovereign in that they are entirely free to leave the EU. This freedom to leave means that the EU is not a “super state”. There is no coercive force, no EU army, to force Britain or any other country to remain in the EU. Britain enjoys a freedom, within the EU, that colonies did not enjoy within the British or other European Empires.

Britain is thus entirely within its rights in considering the option of leaving the EU, although that does not mean that such a course would be wise.

The EU does not exist on the basis of coercion. It exists on the basis of common rules, or Treaties, applicable to all, interpreted independently by the European Commission and the European Court of Justice, that EU have so far countries freely abided by, even when particular decisions were not to their liking. If countries started systematically ignoring EU decisions, the EU would soon disappear.

One set of particularly important set of EU rules are the ones that apply to budget deficits and debts of EU countries within the euro zone. These rules have been incorporated in EU Treaties and in Treaties between Euro area states. One of the provisions is that if a country has an excessive deficit, it must reduce that deficit by an amount equivalent to 0.5% of GDP each year until it gets its deficit below 3%.

France and Italy, big states that were founder members of the EU, have both produced budgets for 2015 that do not comply with the rules.

Initially the European Commission objected, and both countries have adjusted their budgets a little. But, even after these revisions, the budgets are still in breach of the EU rules.

Some will argue that it is the rules that are at fault, not France and Italy. Inflation is negative, so debts increase in value, while prices are falling.

Countries are caught in a debt deflation trap of a kind that was not envisaged when the rules were drawn up. But that is an argument for changing the rules, not an argument for ignoring them or pretending they have been complied with when they have not been.

But changing the rules would require EU Treaty change, and nobody wants to change the Treaties, because a Treaty change would have to be unanimously agreed among all 28 EU states. Other states fear that would be an opportunity for Britain to use the lever of blocking a Treaty change to revise the fiscal rules, with which it might otherwise agree, simply as a means of getting a concession of British demands for

+ a restriction of free movement of people within the EU,

+ vetoes for a minority of national parliaments on EU legislation and

+ the scrapping the goal of “ever closer union” within the EU.

This is a form of blackmail, but it has happened before in EU affairs.

But if the EU is unable to change its Treaties, because of blockages like this, the EU will eventually die. Necessary EU Treaty change cannot be dodged indefinitely. The EU will atrophy if it cannot change its Treaties, in the same way that states would wither, if they could not change their constitutions from time to time.

In a recent commentary, Daniel Gros of the Centre for European Policy Studies has criticised the European Commission of Jean Claude Juncker for failing to either

a.) Insist that France and Italy stick by the existing fiscal rules or, if not

b.) Call for a revision of the rules to take account of the exceptional deflationary conditions that exist